GM: Another Bad Development

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Nov 16, 2005 8:22 pm

http://biz.yahoo.com/ap/051115/gmbankruptcy_fears.html?.v=7


"GM spokesman Jerry Dubrowski responded by saying the automaker has "no plans to declare bankruptcy," and he noted that GM has about $19 billion in cash on hand. Beyond that, he declined to discuss recent pricing trends for credit default swaps. "Typically we don't comment on stock prices or bond prices," he said. "We don't think it is appropriate to do that." (Doberman: $19 B cash on hand? Last time I saw the figure, it was between $30-40 B. Don't forget, GM is contractually obligated to pay Delphi 1/2 of its cash on hand.)


"...Wall Street's credit default swaps traders now view GM as a company so risky that a holder now must pay as much as $12 per year for every $100 of the automaker's five-year corporate debt if they want to hedge against a default, up from $8 to $9 just several weeks ago. In addition, credit default swaps traders are now demanding more of that money up front from investors looking to protect their GM holdings."


If you have a prospect who owns GM, do your homework on GM and present the case for dumping the stock/debt and dumping the broker who sold it to them. If your client owns GM, you'd better hope they aren't my prospect!

Nov 16, 2005 11:27 pm

Why is this a surprise? You must have noticed when GM was downgraded to

junk status around March of this year.

Nov 17, 2005 1:27 pm

Doberman   -


So you think you would be doing my clients a service by "realizing" the 25 - 30 % loss in GMAC, when they don't have to. You sound a little trigger happy. That's a big dollar amount to have to make up, and by the by....bids for my positions have been 5 - 7 clicks lower over the past 6 months. If I did not sell then, why would I sell now? I  am not going to make a panic decision based on media, and interpretation. I will say, yours is a good prospecting idea, to play on the fears of bondholders. However, knowing why the clients have the bonds in the first place, and knowing the overall objectives and financial profile, we are staying put.


My take: GMAC will be fine, GM will have to completely overhaul there business model but will evolve. Companies , and people are a resiliant bunch. You all know as well as I do, that opportunists are swarming to be the next turnaround king......and thank god for them. There is too much name recognition and market share at stake. That being said, it may just be too painful a ride for most clients. I had a guy, who is considering buying insurance at 12 dollars per hundred........Who would do that?????

Nov 17, 2005 8:28 pm

skeedaddy: Why is this a surprise? You must have noticed when GM was downgraded to junk status around March of this year.


----------------------------------------------


No surprise, at all. If you read some of my previous posts, you'd see that I've been predicting GM's ultimate demise, for a while now. However, several posters have been taking me to task, advocating that a miracle may occur and GM will turnaround. They could be right, but I seriously doubt it.


GM has been suffering a serious financial decline, for a long time now. They've managed to temporarily mask the financial decline with incorrect financials (see latest income restatements) and artificially pumped-up sales figures from cut-to-the-bone sale prices and no-interest financing. Between the union contracts, pension underfunding, the 50% of cash they're obligated to pay Delphi, high interest rates, high gas prices, etc. I don't see the light at the end of the tunnel. And frankly, I don't see this as an opportunity for any of my clients or anyone else.


I'll go out on a limb and predict the path GM will take toward bankruptcy:


- Within a few months, GM will drastically cut or eliminate their dividends (across all equity types).


- Next, GM will suspend interest payments on their bonds. This will put them in default, possibly triggering creditor meetings.


- Creditors will push for bankruptcy, as the only hope for GM.


- GM will file for bankruptcy and all equity holders will be wiped-out. Debt holders will be offered equity in the new GM, in exchange for their now worthless bonds.


The only glimmer of opportunity I see, to invest in GM, is to do it after the bankruptcy filing and then only to buy the debt for "nickels or dimes" on the dollar (on the hope that it gets exchanged for equity in the "new" GM).


Nov 17, 2005 8:45 pm

moneyadvisor:

Doberman   -


So you think you would be doing my clients a service by "realizing" the 25 - 30 % loss in GMAC, when they don't have to. You sound a little trigger happy...


------------------------------------------------


GMAC is a gray area. There has been a lot of speculation how a GM bankruptcy filing might affect GMAC. Would the bankruptcy court separate GMAC from GM? Or would it be included in the whole ball of wax? The unions are fighting any separation, so I doubt a resolution to this matter would occur before a bankruptcy filing.


If your client has a large position in GMAC bonds, I'd discuss it with them (of course) and recommend that they sell half their position. Sure, it's at a loss, but there are too many unknowns to bet a large wad of your client's money. Besides, it could get awkward at arbitration, trying to explain why you didn't attempt to salvage some of your client's money, by hedging against the possible inclusion of GMAC in the GM bankruptcy filing.


Nov 18, 2005 7:51 pm

A good blog on GM:


http://globaleconomicanalysis.blogspot.com/2005/11/can-gm-be -saved.html

Nov 20, 2005 7:28 pm

So Toyota and BMW plan to hire more Americans while GM is going to

furlow/fire/early retire another 20,000? Why can't the Big Three design cars

that people want to buy? Or are "legacy costs and pension liabilities" going

to bring down the rest of the Dow Jones 30?

Nov 20, 2005 8:31 pm

Or are "legacy costs and pension liabilities" going
to bring down the rest of the Dow Jones 30?


Yes.

Nov 22, 2005 11:51 am
doberman:

If you have a prospect who owns GM, do your homework on GM and present the case for dumping the stock/debt and dumping the broker who sold it to them. If your client owns GM, you'd better hope they aren't my prospect!



Doby, let me see if I've got this straight: To open an account with a new prospect you pick something out of the portfolio that's currently trading at a loss and you recommend that they sell it? You do this to to undermine the prospect's confidence in their current advisor so that they will move the account to you? You give the prospect your best rearranging deck chairs on the Titanic pitch, scare the propect into doing business with you? So even though the timing of the sale couldn't be worse for the client, selling the security at it's low, costing the client a maximum loss, it's all good at the Doberman household. This event cost you nothing, no skin off your back. You've got a new account, and are booking new commissions or fees. That about it Doby? Business at any cost as long as it's not costing you?


I'm not defending GM here, but coming at a prospect when clearly you have an agenda that is far from partial and recommending that they flush their money down the drain just so you can make some money is to quote our VP "reprehensible". Everyone of us can play that game and it's definately not in the client's best interest.


As for GM you might want to take your own advise and do your homework. GM has some significant hurdles ahead, but for starters I'd stop giving weight to what the day traders think. They're day traders! Their investment horizon is the next five minutes. That said I would advise anyone who has clients with GM paper to have frequent discussions with those clients and to present the risks involved in a non sales presentation. doing this lets the clients decide where their comfort level is and protects yourself from the opportunistic snakes who have no problem with capitolizing on a negative situation to enrich themselves regardless of the cost to the client. 


Nov 22, 2005 1:53 pm

Rarely do you see a doctor and not walk out with some prescription, whether its for blood pressure, depression or better sex.  The reason is that you came in with a concern and you leave satisfied that something is being addressed. 


When a prospect is sharing their financial concerns and you don't rebalance, realign or propose some sort of adjustment, then you're not satisfying that human need.  If GM hurts them, then GMs got to go. 


Alot of people hung on for a turnaround at Enron, Kmart, and my personal worst, Iridium Satellite.   



Nov 22, 2005 2:57 pm
skeedaddy2:

Rarely do you see a doctor and not walk out with some prescription, whether its for blood pressure, depression or better sex.  The reason is that you came in with a concern and you leave satisfied that something is being addressed. 


When a prospect is sharing their financial concerns and you don't rebalance, realign or propose some sort of adjustment, then you're not satisfying that human need.  If GM hurts them, then GMs got to go. 


Alot of people hung on for a turnaround at Enron, Kmart, and my personal worst, Iridium Satellite.   



Agree.


It's the opportunist that I directed my post to. No one on this board can say what will happen to GM. The odds makers, based on what happens to most CCC paper have said GM's got a 40% chance of going under. Holders of GMpaper have to know that and have to know how the oddsmakers arrived at that number, which by the way has nothing to do with GM. It's pure statistics. The right thing to do is to have a conversation with clients that lays out all the pros and cons. Doby didn't advocate that. His approach is to hammer the clients into selling the paper at any cost. No doubt that there are some investors who have no business being in GM paper and they should get out. But for the rest, it's a case by case basis. Only an informed advisor can do this. As an example I recently had an account acated in to me that held 100 long term GMAC bonds. The bond were valued at about 75 cents on the dollar. The 92 year old client and her son who had poa wanted to know what to do with the bonds. Even though the clients health was good, she's 92 years old. She didn't belong in these bonds to begin with, yet here we were down 25% plus. Because the damage is done with these bonds right now I didn't see significant downside to continuing to hold them. The high coupon can not be replaced and our research shows that there is no default possibilities within the client's expected life span. All this plus the downside if our analysis is wrong was discussed with the client. The client decided to hold. I got zero commission. Shortly thereafter the client passed away. We are submitting a request to have the death put honored. The estate will get 100 cents on the dollar and I will still make zero. Unfortunately, the son is not the beneficiaryof this money. The money(several hundred thousand dollars) will go to her grandchildren who according to their father have already spent the money. Of course that's not theoutcome I was hoping for but that's the way it goes. The son, who also transfered his account to me realized the good fortune of not just selling GMAC. He referred a friend who just retired from his company. The rollover just came in. So in the end I do get paid. Again. the point is, each case has to be deliberated seperately taking all facts into consideration. This woman was an obvious GMAC sell candidate. Yet, stepping back and looking at the situation in total enable us to do what was right for her family.

Nov 22, 2005 3:01 pm

You did the right thing TJ.  If more folks in our business thought that way we'd probably have a lot better reputation as an industry....!

Nov 22, 2005 8:17 pm

First point: If an advisor has kept their client fully informed as to the potential risks involved with GM and the client still chooses to keep the stock/bond, then my attempt to educate (my prospect / your client) will be for naught. However, if the advisor hasn't done their job, then the prospect is ripe for the acating. That's right, I'll snatch your client, sell-out their GM investments (at a loss, if necessary) and have them thanking their lucky stars I caught them in time.


Second point to consider: If your client has a substantial investment in GM (whether you put them in it or not) and GM goes belly-up and their equity is wiped-out and/or their bonds drop another 40+% in value, what would the arbitration panel think of your performance as an advisor? How could you justify allowing your client keep a substantial portion of their investments in GM, after multiple credit rating downgrades to junk and substantial financial decline? Would your only defense be, "But I thought GM was too big to fail!"?


Third point to consider: You've just met with your client and explained all the risks involved with GM and you both agree to keep the GM stock/bonds, because the investment represents a great opportunity to make substantial profits... It's now 8 months later and GM has declared bankruptcy, the stock is wiped-out and the bonds trade for pennies on the dollar. Your client just got his statement and he's furious with you. How could you let this happen? He was counting on using this money for...! IT'S YOUR FAULT! Sure, you've documented everything, but will the arbitration panel still rule your way? Was it worth your trouble?

Nov 23, 2005 11:49 am
doberman:

First point: If an advisor has kept their client fully informed as to the potential risks involved with GM and the client still chooses to keep the stock/bond, then my attempt to educate (my prospect / your client) will be for naught. However, if the advisor hasn't done their job, then the prospect is ripe for the acating. That's right, I'll snatch your client, sell-out their GM investments (at a loss, if necessary) and have them thanking their lucky stars I caught them in time.


Second point to consider: If your client has a substantial investment in GM (whether you put them in it or not) and GM goes belly-up and their equity is wiped-out and/or their bonds drop another 40+% in value, what would the arbitration panel think of your performance as an advisor? How could you justify allowing your client keep a substantial portion of their investments in GM, after multiple credit rating downgrades to junk and substantial financial decline? Would your only defense be, "But I thought GM was too big to fail!"?


Third point to consider: You've just met with your client and explained all the risks involved with GM and you both agree to keep the GM stock/bonds, because the investment represents a great opportunity to make substantial profits... It's now 8 months later and GM has declared bankruptcy, the stock is wiped-out and the bonds trade for pennies on the dollar. Your client just got his statement and he's furious with you. How could you let this happen? He was counting on using this money for...! IT'S YOUR FAULT! Sure, you've documented everything, but will the arbitration panel still rule your way? Was it worth your trouble?



As advisors it's situations like this that seperate the men from the boys and the woman from the girls. Essentually with regard to GM/GMAC, if your clients own the paper and are at a loss, the die is cast. You have liability either way. If you recco hold and GM augurs in then you're going to have to answer for that. Likewise if you recco sell at a substancial loss and GM survives then you will have to answer as to why you ran for the exits. This is especially true right now when even the most pessimistic on wall street are still giving GM more favorable odds of avoiding bankruptcy. Recommending selling GMAC at a loss goes into the inexcusable column and definately is an arbitration looking for a place to happen. Contrary, buying short GMAC paper at a discount is one way to seperate yourself from the autobatron asset gatherers over at Cookie Cutter Investments. Swapping out of Long Term GM paper for GMAC is another strategy that will seperate you from the crowd that gets their marching orders from their branch manager and their research from MSNBC. It's tax time look for GM holders with gains and have a conversation.


For arbitration purposes there are two types of clients. Long term holders who have been caught up in the GM situation and the opportunist trying to grab high yield or play the situation. The players are less of a concern. Yet, contacting all clients and documenting that you didn't act irresponsibly would carry weight at an arbitration hearing. Showing that you responded to the deteriorating conditions of any investment with records of meetings as well as records that other clients made contrary(sell) decisions based on those meeetings would show an arbitration panel that as an advisor you acted in the client's best interest. Would it make difference in the outcome of the hearing, probably not.


GM's going bankrupt in eight months? WOW!  Doby, you are entitled to your opinion. What you're not entitled to do is use your blantant sky is falling scare tactics to enrich yourself. While in a perfect world I would like to believe that you and the rest in our profession are having balanced discussions with clients for the purpose of helping them do what's right for their situation you are showing us that's not what you are doing. Instead, you've turned the GM problem into a personal prospecting opportunity where your goal is not to help the client reach a correct conclusion, but where the agenda is to get the ACATS form signed and the sell commissions booked. Unfortunately, the poor prospect is deceived into believing that you are there to help them, not yourself. That's straight out of the First Jersey(Look'em up) prospecting manual. For long term holders of GM the current situation has obviously become very distressing. Now in addition to being bombarded with negative press, worrying about their investments, watching their net worth erode, they stand to be victimized by opportunist advisors whose agenda is to line their own pockets regardless of the cost to the client. That's more than wrong, it's dirty. These people need informed advise, not agenda driven boiler room sales tactics.


The problem you present to me is using your scare tactics to undermine my client's confidence in decisions we've reach. Look at the difference in our agendas. Mine is to help a client I know and care about reach right a correct conclusion. Yours is to get the client to fire me. Whether you do it directly by using scrare tactics to gain an audience with the client or indirectly by getting to one of my clients friends or associates, you pose a danger of doing great damage for no better reason than to make a sale. The client comes out last in that scenerio.


There is no doubt in my mind that you would have recommended to the client in my previous post that she sell GMAC immediately. A $20,000 + mistake on your part. Of course then again you would have made money and you can explain it away by telling yourself,"Who knew the old lady was going to die?"


You seem overly concerned with arbitration. Again putting yourself first. Put the client first and arbitration is a self solving problem.

Nov 27, 2005 5:03 pm

On the contrary, putting the client first will, if not avoid arbitration, at least give you a good chance at obtaining a good outcome.


Here's the bottom line: You had a client in an investment grade bond/equity. That investment grade has just been slashed to junk. It's a good chance (not slight), that the company will declare bankruptcy. You or I don't know what will happen. If bankruptcy is declared, your client is going to get stiffed big time!


Do you roll the dice with your client's money? How is that putting your client first? What would an arb panel say about this?


Are GMAC bonds safe? The unions are going to fight any separation of GM from GMAC. PLUS, the Pension Benefit Guaranty Corp has made it known that it may require a substantial cash infusion from GMAC to GM (to shore-up the retiree benefits side) before approving any separation of GMAC.


All I see are future black holes for GM & GMAC that could swallow up my investment grade clients' money. Not worth the risk in my book.


Nov 28, 2005 5:12 pm
doberman:

On the contrary, putting the client first will, if not avoid arbitration, at least give you a good chance at obtaining a good outcome.


Here's the bottom line: You had a client in an investment grade bond/equity. That investment grade has just been slashed to junk. It's a good chance (not slight), that the company will declare bankruptcy. You or I don't know what will happen. If bankruptcy is declared, your client is going to get stiffed big time!


Do you roll the dice with your client's money? How is that putting your client first? What would an arb panel say about this?


Are GMAC bonds safe? The unions are going to fight any separation of GM from GMAC. PLUS, the Pension Benefit Guaranty Corp has made it known that it may require a substantial cash infusion from GMAC to GM (to shore-up the retiree benefits side) before approving any separation of GMAC.


All I see are future black holes for GM & GMAC that could swallow up my investment grade clients' money. Not worth the risk in my book.


As you said, we don't know what will happen. I agree with telling the client's GM the whole story, what we do know. I disagree with slanting the story with scare tactics designed to meet an agenda of transferring the account or generating a commission. Tell it like it is and let the client decide. As for GMAC, not nearly as negative as GM. Again, tell the story and let the client decide if it's too much risk. First step, learn the story, both sides, not just the side that gets you an account.


Feb 7, 2006 8:07 pm

Update on GM: dividend slashed 50% today.


Snippet from the below-mentioned link:


"One of the key issues involving the UAW is talks related to problems at Delphi Corp., the former GM parts unit that filed for bankruptcy protection in October and is seeking significant pay and benefit reductions from its workers. The UAW has said it could strike against Delphi, a move that would be devastating for GM. In addition, GM has said it could be on the hook for up to $12 billion in obligations to Delphi as part of the 1999 spin-off agreement. Mr. Wagoner said he had no news on the Delphi situation, but said that GM is working on the matter and hopes to have something to say about it soon."


http://dailynews.att.net/cgi-bin/news?e=pri&dt=060207&am p;cat=business&st=1&src=wsj

Feb 7, 2006 8:58 pm

Enough already.  If you have 100k in GMAC with a 7% coupon equals $7,000 a year.  You've owned it for 4 years, $28,000.  Your bond is trading at 80.  What the f**k have you lost yet? 80k + 28k equals 108k.  (Granted I left out taxes).  Sell it if you feel unconfortable but shut up about the losses.  It is a matter of total return.  The longer you hold if they can continue to pay the lower overall cost of the investment.  A bond is an investment like a stock or anything else.  Unless its insured, there is NO guarantee.  So enough of this BS about selling it at a 25% or 30% loss. 

Feb 7, 2006 10:16 pm
VotedforKerry:

Enough already.  If you have 100k in GMAC with a 7% coupon equals $7,000 a year.  You've owned it for 4 years, $28,000.  Your bond is trading at 80.  What the f**k have you lost yet? 80k + 28k equals 108k.  (Granted I left out taxes).  Sell it if you feel unconfortable but shut up about the losses.  It is a matter of total return.  The longer you hold if they can continue to pay the lower overall cost of the investment.  A bond is an investment like a stock or anything else.  Unless its insured, there is NO guarantee.  So enough of this BS about selling it at a 25% or 30% loss. 


dude you have serious anger issues....

Feb 8, 2006 12:14 am

LOL, I'm not that angry.  But damn, can't these brokers add.  I'm not talking about evaluating just GMAC bonds.  You can use this rationale with any investment.  Did anyone else besides me take finance courses in college?